Unprecedented Times Call For Unprecedented Go Big Or Go Home Measures

The seemingly prevailing “whatever it takes” mantra now being broadcast out of Washington may provide the appropriate, rational and meaningful support for our critically important $3.9 trillion public finance business. The Fed is pulling out all the stops including throwing in the “kitchen sink” to infuse massive monetary stimulus into the economy and Federal stimulus legislation is designed to provide significant support for those employees and business owners most afflicted by the current economic suspension. New authority backed by growing industry lobbying support has taken hold that would grant broader powers to the Federal Reserve Board by allowing the Central Bank to purchase investment grade municipal securities of all maturities. In our view, expanded Fed support for the municipal bond market as part of an unprecedented, more broadly-defined open-ended quantitative easing program should provide an important facility that would help to ensure the availability of adequate liquidity at a time of historic market and economic disruption when many municipal governments are struggling to balance their essential service needs against swelling coronavirus-related healthcare spending requirements. Let’s remember that state and local governments have far greater limitations on borrowing, spending and revenue raising capabilities compared to the U.S. government.

While it is difficult to define newly authorized Fed capabilities in simplistic terms, we are now going through an atypical recession that requires atypical Fed intervention. Whether or not the Fed’s new-found authority for munis can stem the massive liquidations from mutual funds and ETFs for an extended period only time will tell, but we are optimistic. Activity this week shows a market rally and that the fear and panic selling has subsided and professional investors seem to be more focused on the relative value proposition as more reasonable clearing levels and better price discovery have moved into sight. We are now seeing more bidders with a firmer tone on retail bid-wanted lists and dealers are becoming more assertive with the buy-side for a welcome change. We believe that the Fed liquidity measures and the government’s fiscal stimulus package will bolster muni market and credit conditions and we can expect tax-exempt yields to make valid attempts to retrace part of their recent advances, but with directional volatility and an unlikely return to their historical lows (but they may be retested) any time soon.

If everything lines up, we would also expect the pace of outflows to abate with possible inflows not out of the question. We further anticipate a primary calendar build given a growing backlog of deals and a more orderly secondary business with continually improving price discovery and a stronger bid-side. Of course, this all depends upon a near-term flattening of the virus curve coupled with a rational and systematic reopening of the economy that does not run at variance to public health concerns. The Central Bank will now be able to hopefully keep the credit plumbing functioning given its “go big or go home” application of liquidity support, but with re-routed and larger pipes reaching employers, consumers, businesses, and now state and local governments with expectations for even broader credit/lending facilities.

For a comprehensive portfolio evaluation of your municipal holdings, please contact your Oppenheimer Financial Advisor.